How Slovenia Is Planning to Avoid Asking for a Bailout

Marja Novak and Michael Winfrey

Friday, 12 Apr 2013 | 3:50 AM ETReuters

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Erik Zunec | E+ | Getty Images

Ljubljana, Slovenia

LJUBLJANA (Reuters) - Slovenia, struggling to avoid following Cyprus into a bailout, announced plans on Thursday for the early rollover of debt maturing in June, a move that could calm markets and thwart a squeeze on its finances.

But in a decision that underscored concern over the three-week-old government's commitment to reforms, parliament postponed a vote on a "golden rule" seen as a condition if the nation of 2 million people wants to seek aid from its euro zone partners.

Criticised in reports from international institutions this week and facing investor frustration over unclear plans to clean up its banks and cut its budget deficit, Slovenia has watched its borrowing costs jump since the Cyprus's messy rescue.

Slovenia was the first state to break away from the former Yugoslavia in the 1990s, but failed to follow other ex-Communist European Union states in privatising its biggest banks. Political influence and bad management have piled up a bad loan burden that some investors fear is too big for the country to manage alone.

The maturing bills carry interest of 3.99 percent. Grahek said the auction may also explain why the ministry sold only about half the 100 million euros in short-term paper it has aimed for in an auction this week, in which yields on 1 year bills jumped by half to 2.99 percent, because the banks were anticipating the new sale.

The government needs about 3 billion euros this year to recapitalise state-owned banks, repay maturing debt and cover the budget deficit.

But yields on its 10-year benchmark bond rose to 6.48 percent on Thursday - closer to the 7 percent threshold at which a country's finances can become unsustainable - from 4.77 percent on March 15, the day before the Cyprus bailout deal.

GOLDEN RULE POSTPONED

On Wednesday, the European Union's executive Commission issued a "wake-up call" to Slovenia, Spain and other countries over their failure to bring their budget deficits in line with the bloc's prescribed norms.

It followed a critical report from the OECD club of wealthy states that said Ljubljana may have underestimated the cost of the clean-up of its three biggest banks - all state owned - that the IMF estimates will cost up to 1 billion euros this year.

The government is also mulling austerity measures and a "golden fiscal rule", which all euro zone members have to enforce by the end of the year and which would require governments to achieve a nearly balanced structural budget.

Passing the law would send a positive signal to markets, analysts said, but Prime Minister Alenka Bratusek said parties had not yet agreed on the year that it should take effect and postponed a vote planned for Thursday until May 7.

The centre-right opposition has suggested 2015, but parties in the four-member ruling coalition, which have resisted spending cuts, have suggested they want more time.

Slovenia's European Central Bank Governing Council Member, Marko Kranjec, said it would be possible for Slovenia to avoid a bailout, but the "ball is in the government's court."

"The situation of course is serious and it is the government that has to take steps to give very clear signals that they are serious," he told Marketnews in Dublin. "And if they do it I believe it will be possible to get out without any programme."